Saturday, October 22, 2011

Businesses under attack don't hire

Around the world businesses are under attack - increased taxes, more onerous regulations and the explicit or implicit risks of more to come. Obamacare, carbon taxes, higher consumption taxes, Dodd-Frank and its equivalents and so on are becoming a global epidemic.

Likewise the "rich" (insert definition of choice, but basically the western world's declining middle class as well as genuinely wealthy) are under attack from rising tax burdens, rising living costs (e.g. education and health care) and face widespread threats of more (the "rich" should pay more etc).

Regardless of the merits of individual proposals (and most are nothing more than a naked grab for revenue so governments unable to live within their means can make electoral bribes to people who, for the most part, take from rather than contribute to the cost of running the country), one of the consequences of the attacks on businesses and taxpayers is that they feel threatened. People who feel threatened don't spend - they go into survival mode:

  • businesses (especially smaller businesses) don't invest in expansion and don't hire - they conserve their cash rather than risk it

  • taxpayers (especially the middle class) faced with the prospect of rising taxes will cut back spending where possible (discretionary consumption spending and charity being the easy cut backs) - they pay down debt and build emergency funds

  • investors divert money away from risk assets into safer investments - in particular government issued or backed securities which do much less for economic expansion than many other forms of investment

Simple message - if you want businesses to invest in themselves and create jobs, take away the threats. This is especially true for countries which do not enjoy a low cost labour advantage.

And yes, I had far too much to drink last night.


Anonymous said...

Drink plenty of water - In the meantime here is a localised version

Around Hong Kong businesses are under attack - exorbitant and rising rents are becoming a local epidemic.

Likewise the "tenants" (insert definition of choice, but basically Hong Kong's declining middle class) are under attack from rising rent burdens and face widespread threats of more (the "tenants" should pay more rent etc).


traineeinvestor said...

Thanks for the comment.

I'd say that this is partly true.

Rising property values and rents are usually a consequence of economic expansion. Yes, they may slow down expansion but this will only happen when the businesses have been doing well anyway.

Also, if this logic is applied to all business expenses, then you would also have to argue that employee costs are too high - in a service economy like Hong Kong, for many businesses, employee costs are usually a much higher portion of overheads than rents.

Although slightly off topic, its also worth noting that rents relative to property values are rather low making it hard to justify buying property at the moment (it's been a long time since we last purchased a flat).


Super Saver said...

Too bad President Obama hasn't yet figured out this simple truth :-)